Economy Watch: Fed Wants Big Banks to Beef Up Liquidity

The Federal Reserve proposed a rule to make too-big-to-fail banks and other deep-pocket entities less likely to fail.

The Federal Reserve proposed a rule on Thursday to make too-big-to-fail banks and other deep-pocket entities less likely to fail. The rule would require large financial entities to strengthen their liquidity positions even more than they already have, and would for the first time create a standardized minimum liquidity requirement for large and internationally active banking organizations and systemically important, non-bank financial companies.

Under the rule, the institutions would be required to hold minimum amounts of high-quality, liquid assets such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash. Each institution would have to hold liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. The ratio of the firm’s liquid assets to its projected net cash outflow is its “liquidity coverage ratio,” or LCR.

The LCR would apply to all internationally active banking organizations—generally, those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure—and to systemically important, non-bank financial institutions. The proposal also would apply a less stringent LCR to bank holding companies and savings and loan holding companies that aren’t internationally active, but have more than $50 billion in total assets.

“Liquidity is essential to a bank’s viability and central to the smooth functioning of the financial system,” noted Chairman Ben Bernanke. “The proposed rule would, for the first time in the United States, put in place a quantitative liquidity requirement that would foster a more resilient and safer financial system in conjunction with other reforms.”

Hires, separation rates stagnant in August

The Bureau of Labor Statistics reported on Thursday that there were 3.9 million job openings on the last business day of August, little changed from July. The hires rate (3.3 percent) and separations rate (3.2 percent) also were little changed in August.

The BLS also formulates a quits rate, which tracks voluntary separations initiated by the employee, and is an indirect indication of the health of the economy because it measures workers’ willingness or ability to leave jobs. The quits rate rose over the 12 months ending in August for total jobs and total private jobs but was unchanged for government positions (if you have one of those jobs, hang on to it, in other words).

Separately, the U.S. Department of Labor reported on Thursday that initial unemployment claims dropped to 350,000 for the week ending Oct. 19, a decline of 12,000 from the previous week. The less excitable four-week average was up 10,750 to 348,250. It isn’t clear yet whether reporting problems from the largest state, California, are still affecting the weekly initial unemployment claims data.

Wall Street had another up day on Thursday, with the Dow Jones up 95.88 points, or 0.62 percent. The S&P 500 gained 0.33 percent and the Nasdaq advanced 0.56 percent.